3 Factors to Examine When Taking Over a Property with Tenants

by | BiggerPockets.com

What do real estate investors need to look at when buying properties with existing tenants?

Buying properties with existing tenants can be very beneficial. Whether you’re looking at a wholesale deal or long-term hold rental, inherited tenants can mean instant cash flow, lower risk, and more net profit. They can even make the property more attractive for other investors, financiers, and end buyers.

Of course, this is only true if the tenants are good, performing renters. Or you can at least use the situation to get a great deal, which you can then add value to. The last thing you want is to walk into a bad situation that will cost you far more than you bargained for and that could turn into a legal nightmare. So, what should you be looking at when evaluating properties with existing tenants?

3 Factors to Examine When Taking Over a Property with Tenants

1. Tenant Performance

Don’t just look at local rental asking prices or leases on the property. You need to know whether the renters are actually paying and whether you can expect them to pay on time. If not, are there good late fees in the lease that can add to the bottom line? Are any tenants in default or the eviction process? Will that be complete before you close?

first-multifamily-deal

Related: 6 Reasons Good Tenants Don’t Renew Their Leases

Talking directly with the tenants to get their version is a smart move, too. Watch out for discrepancies between what the seller is saying about the status of the rent and deposits and what the renter says. Also, beware of special deals. Are there any discounts for repairs or work that the tenant is doing?

As a part of your due diligence, you may want to conduct some basic background checks on the seller and the current tenants. Are there any glaring criminal issues or complaints about management that haven’t been disclosed? Know who and what you are working with.

If the numbers or scenario aren’t what you hoped, you can use this as leverage for negotiating a better price or terms. If the seller stays firm, then be willing to walk away.

2. Property Condition

You may not personally need to walk through every unit, but someone on your team needs to. They need to document the current condition thoroughly. You want to know if there are any big pending repairs or dangerous situations that need to be remedied before or as soon as you take over. You want to know if some renters are destroying the unit and if others are going above and beyond to take care of your asset. All these repair costs need to be factored into your underwriting of the deal—because that is capital coming out of your pocket. If you were unaware of some of the repairs up front, you can use this as leverage when negotiating with the seller.



Related: The Top 10 Rental Features That Attract Cream of the Crop Tenants

3. The Numbers

In scenarios when a tenant is in place, running your numbers conservatively can be beneficial. This means you should assume the worst, which is how I generally purchase properties. I assume the seller is selling the property because of the troubled tenant. I factor that into my calculations, assuming the tenant is going to move out or that I will have to evict them and then spend additional capital to get the property rent-ready. From experience, these situations only work out 30% of the time, so I have grown accustomed to accounting for the worst case scenario.

Summary

Existing tenants can be good or bad. Whatever the situation, there is a price point and terms that can turn this situation into a good opportunity. If the tenants are at fault for property damage or non-performance, check the lease expiry dates. You may be able to get them out before closing or within 30 days. For others, you may want to negotiate an early exit.

What has your experience with existing tenants been?

Leave a message. I’d love to chat.

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record.

2 Comments

  1. Erik Whiting

    Good tips, thanks for sharing!

    One other thing I’ll add that piggy backs onto Item 1–have tenants sign an estoppel letter that acknowledge all terms of the existing lease (if there is one) and/or the basic terms of whatever verbal rental agreement they have, and list the details on who owns what appliances, and any other special terms, conditions, or agreements they have with the current land lord and further stating that no additional terms added between the date of the estoppel letter and the closing date will be honored by the new owner. This keeps them from saying they were promised a $10,000 kitchen upgrade the day after you get the keys!

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